Mesenchymal stem cells (MSCs) are multipotent progenitor cells that have emerged as a promising tool for clinical application. Further clinical interest has been raised by the observation that MSCs are immunoprivileged and, more important, display immunosuppressive capacities. These properties may be of therapeutic value in allogeneic transplantation to prevent graft rejection and to prevent and treat graft-versus-host disease. In the present study, we examined the in vivo immunomodulatory properties of MSCs in murine models of allogeneic bone marrow (BM) transplantation. Sublethally irradiated recipients received allogeneic BM with or without host or donor MSCs. The addition of host MSCs significantly enhanced the long-term engraftment associated with tolerance to host and donor antigens. However, the infusion of donor MSCs was associated with significantly increased rejection of allogeneic donor BM cells. Moreover, we showed that the injection of merely allogeneic donor MSCs in naive mice was sufficient to induce a memory T-cell response. Although the observed engraftment-promoting effects of host MSCs in vivo support the therapeutic potential of MSCs, our results also indicate that allogeneic MSCs are not intrinsically immunoprivileged and that under appropriate conditions, allogeneic MSCs induce a memory T-cell response resulting in rejection of an allogeneic stem cell graft.